Emerson 2004 Annual Report Download - page 23

Acquisitions and Divestitures
During 2004, the Company acquired the North American outside plant and power systems business of Marconi
Corporation PLC, as well as several other smaller businesses for a total of approximately $414 million in cash. In
the third quarter of 2003, the Company sold the Dura-Line fiber-optic conduit business, which is reported as
discontinued operations. See discussion of Discontinued Operations below for additional information.
Costs and Expenses
Cost of sales for fiscal 2004 and 2003 were $10.0 billion and $9.1 billion, respectively. Cost of sales as a percent
of net sales was 64.4 percent for 2004, compared with 64.9 percent in the prior year period. The increase in
the gross profit margin from 35.1 percent in the prior year to 35.6 percent for 2004 primarily reflects increased
volume and leverage on higher sales, as well as benefits realized from prior rationalization and other cost
reduction efforts. These improvements, however, were partially offset by negative impacts from lower sales
prices and higher costs for wages and benefits (including higher pension costs).
Selling, general and administrative (SG&A) expenses for 2004 were $3.3 billion compared with $2.9 billion for
2003. As a percent of sales, SG&A expenses were 21.0 percent in both 2004 and 2003. Leverage on higher sales
and the benefits realized from prior rationalization efforts that improved the Company’s cost structure were
offset by higher costs for wages and benefits.
Research and development expense was $486 million in 2004, compared with $464 million in 2003. Research
and development as a percent of net sales was 3.1 percent in 2004 and 3.3 percent in 2003, reflecting
Emerson’s continuing investment in technology to improve the Company’s competitive position.
Other deductions, net were $223 million for 2004, a $95 million decrease from the $318 million for the prior
year. The decrease in other deductions, net was primarily due to the $54 million goodwill impairment charge in
the prior year. Also, 2004 included gains totaling $27 million related to the sale of shares in MKS Instruments,
Inc. and the Louisville Ladder investment, while 2003 included gains of $24 million from divestitures. In 2004,
ongoing costs for the rationalization of operations were $129 million, down from $141 million in the prior year,
primarily reflecting lower costs in the network power segment. See notes 4 and 5 for further details regarding
other deductions, net and rationalization costs.
Interest expense, net of $210 million in 2004 was down $21 million from the prior year of $231 million due to
lower average borrowings. During 2004, the Company swapped $600 million of 7 7/8% notes due June 2005 to a
floating rate based on 3-month LIBOR.
Income Taxes
Income taxes for 2004 were $595 million compared to $401 million for the prior year. Prior year income
taxes were reduced $68 million and the effective tax rate for 2003 was reduced 4 percentage points by the
tax benefits from the restructuring of the Emerson Telecommunication Products business (“ETP”) net of the
impairment charge. Excluding these items, the prior year rate is comparable to the approximate 32 percent
effective tax rate in the current year.
Earnings From Continuing Operations
Earnings from continuing operations were $1.3 billion and diluted earnings per share were $2.98 for 2004,
increases of 24 percent compared to $1.0 billion and $2.41 for 2003. These earnings results reflect increases
for all of the business segments, particularly in the network power, process management and climate
technologies businesses. The higher earnings also reflect increased volume and leverage from the higher
sales, savings from cost reduction efforts, partially offset by lower sales prices and other items. The increase
also reflects the decrease in other deductions, net discussed above, partially offset by a $14 million ($0.03 per
share) contribution in the prior year from the tax benefits of the restructuring of the ETP business net of the
impairment charge.
Discontinued Operations
In May 2003, the Board of Directors approved a plan to restructure the Jordan business acquired in 2000,
in which the Dura-Line business would be sold and its other businesses would be retained by Emerson.
Discontinued operations of $76 million, or $0.18 per share, in 2003 included a net gain of $83 million (including
income tax benefit of $170 million), or $0.20 per share, related to the sale of Jordan stock including its Dura-
Line operations. The operating results of Dura-Line have been reclassified to discontinued operations in the
Consolidated Statements of Earnings for fiscal years 2003 and 2002. See note 3 for additional information.
21
International destination sales
increased 17 percent to $7.4 billion
in 2004, representing 47 percent of
total sales.
International Sales
99 04030201
$8
$4
$6
00
$2
(dollars in billions)